The Central Bank has recommended that smaller credit unions continue to merge with larger counterparts in an effort to grow lending and reduce their cost-to-income ratio.
In a review of restructuring in the sector, the regulator found that cost-to-income ratios are “high by historic standards” and represent a challenge to the sustainability of credit unions.
“Total income levels have fallen across the sector, with weak demand for credit resulting in an overall loan-to-assets ratio decline across the sector,” the bank said.
But weak credit growth across the economy, coupled with low interest, can be offset through inorganic growth, the bank found. Between 2013 and September 2018, 135 credit unions merged with larger peers, it said. But while the number of registered unions fell 35 per cent since 2013, there has only been an 8 per cent reduction in business locations.
Restructuring has had the effect of reducing the number of smaller credit unions (with assets of less than €40 million) by 58 per cent, leading to a 93 per cent increase in larger facilities (with assets of more than €100 million).
So while the absolute number of credit unions has fallen significantly (from 419 in September 2008 to 254 in September 2018), that hasn’t “negatively impacted upon membership numbers” in the sector, the Central Bank noted. Between 2013 and 2017, the sector gained 194,000 customers, to bring its total to more than 3.3 million.
“As well as giving transferee credit unions a larger base of income generating assets, in the form of transferred loans and investments, this inorganic growth has also led to faster underlying organic growth in investments and loans,” the review stated.
“This suggests that restructuring has enhanced the financial performance and outlook of transferee credit unions,” it found, adding that “transferee credit unions appear to be outperforming the rest of the credit union sector”.
Expenses reduction
As a result of those findings, the bank suggested that credit union boards, when considering their strategy, consider the opportunities that a merger can bring, particularly with membership and engagement.
And while lending is likely to grow, a reduction in expenses can be expected, given data published by the bank. It found those credit unions that had engaged in restructuring had seen a lower rate of increase in expenses (not including salary costs) than those that had not – 25 per cent compared with 39 per cent – “indicating that credit unions restructuring have been able to achieve economies of scale”.
In terms of salary costs, those institutions that have restructured will have seen a higher rise of 23 per cent compared with the 17 per cent rise at credit unions that have not restructured. The bank believes this may indicate a strategic decision by the larger institutions to invest in better resourcing risk and compliance functions.
“All credit unions should examine their cost structures to seek opportunities to eliminate duplicated costs, and seek to avoid unnecessary expenditure,” the bank concluded while making the case for restructuring.
